International Fisher Effect - IFE


DEFINITION of 'International Fisher Effect - IFE'

An economic theory that states that an expected change in the current exchange rate between any two currencies is approximately equivalent to the difference between the two countries' nominal interest rates for that time.

Calculated as:

International Fisher Effect (IFE)

"E" represents the % change in the exchange rate
"i1" represents country A's interest rate
"i2" represents country B's interest rate

BREAKING DOWN 'International Fisher Effect - IFE'

For example, if country A's interest rate is 10% and country B's interest rate is 5%, country B's currency should appreciate roughly 5% compared to country A's currency.

The rational for the IFE is that a country with a higher interest rate will also tend to have a higher inflation rate. This increased amount of inflation should cause the currency in the country with the high interest rate to depreciate against a country with lower interest rates.

  1. Inflation

    The rate at which the general level of prices for goods and services ...
  2. Exchange Rate

    The price of a nation’s currency in terms of another currency. ...
  3. Nominal Interest Rate

    The interest rate before taking inflation into account. The equation ...
  4. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket ...
  5. Fisher Effect

    An economic theory proposed by economist Irving Fisher that describes ...
  6. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
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